GOODS & SERVICE TAX IN INDIA – Concepts and Constitutional Framework

Paper I

This article is first part of my series of articles on Goods and Service Tax (‘GST’) – Analysis
on Introduction and Impacts in India. I will be constantly updating this GST series with my
further articles on coming days. This First Paper makes an attempt to analyse the constitutional
roadblocks that are on the way as we move closer to projected deadline of implementation of GST
in India. This paper, in particular, rather than offering any constitutional wisdom broadly
summarizes the present constitutional set up for fiscal legislations and reviews the suggestions
made on GST related literature1.

I. INTRODUCTION

Goods and Service Tax (herein after referred as ‘GST’) is a new revelation that is soon to
make its appearance in Indian Indirect Tax Regime. The tax is earlier supposed to make
its grand entry on April 01, 2010 has now been postponed till April, 2011. In the budget
speech of 2010-11, Indian Finance Minister has promised to make an attempt to make
GST applicable in India from 2011 along with Direct Tax Code (herein after referred as
‘DTC’) in direct tax (income tax regime).

There is another one year time period for GST to be implemented in India. Within this
time frame, Indian lawmakers have the task to draft GST laws, and even before that to
decide what should be the rate applicable on the goods and services covered in the Act.
However, the biggest task to lawmakers right now is to decide and agree upon what
kinds of existing indirect taxes and levies would be subsumed in the proposed GST.

1
Authored by Rajib Dahal; B.A; L.L.B (Hons.), NALSAR University of Law, Hyderabad, (2008 May). The author is a
practicing indirect tax consultant. © Rajib Dahal, 2010. No part of this document may be reproduced, copied,
photocopied, transmitted or circulated in any form without prior permission in writing from the author, except for
the purpose of study and research within fair dealing. The Author asserts the moral right to be recognized as
Author.

Any comments or feedbacks on the paper will be highly appreciated. You can reach me at rajib.dahal@gmail.com
or at dahalrajib40@hotmail.com

Electronic copy available at: http://ssrn.com/abstract=1596522

As I said, the biggest tasks for the lawmakers is to decide and agree upon what are
those various taxes, duties, and levies that should be covered by GST. It is the biggest
task because of the characteristic federal set up India has and the administrative,
legislative and taxing powers have been divided among states under Constitution of
India.

II. CONSTITUTIONAL FRAMEWORK – LEGISLATIVE POWERS

India consists of twenty eight states and seven Union Territories and these states have
their own state parliament (known as legislative assembly), and state government,
headed by Chief Minister of the State. Similarly, Central government Union
Government/Cabinet and has parliament represented by the members elected from all
over India. The administrative and legislative powers of states have been governed by
Constitution of India as discussed below:

Part XI of the Indian Constitution deals with the Relations between the Union and the
states. Article 245 deals with the distribution of legislative powers between States and
Union whereby it states that Union Parliament will have power to make laws applicable
to whole of India whereas State Parliament (Legislative Assembly) will have power to
make laws applicable only within the state which has enacted the law.

Similarly, Article 246 demarcates the domain within which the Union and state can
enact laws. Article 246 has to be read along with seventh schedule of the Constitution.
Article 246 mentions that Union Parliament has all the power to make laws applicable
within India on those subjects matters which are incorporated in List I of the Seventh
Schedule; State Parliament has power to make laws applicable with in such state on
such subjects which are incorporated in List II of the Seventh Schedule; and both the
Union and the state can legislate on any subjects that are incorporated in List III of the

Electronic copy available at: http://ssrn.com/abstract=1596522

Constitution. These three lists are also called Union List, State List and Concurrent List
respectively. In the matters which are enumerated in Concurrent list, though both state
and Union will have the power to legislate, the law made by the Union Parliament
prevails over laws made by state in case of conflict of laws made by state and Union.

Within these constitutional framework, Union can make laws on areas of national
defence, naval, military and air forces etc. on administrative fronts as these subjects are
enumerated in Union List – List I of Seventh Schedule. On the issues of fiscal
legislations, Union has been entrusted to frame laws on inter-state trade and commerce
(Entry No.42), banking (Entry No.45), stock markets (Entry No.48), taxes on income
other than agricultural income (Entry No.82), duties of exports including export duties
(Entry No. 83) etc.

Similarly, Within these constitutional framework, State can make laws on areas of
police, public orders, prison, criminal justice procedures etc. on administrative fronts as
these subjects are enumerated in State List – List II of Seventh Schedule. On the issues of
fiscal legislations, State has been entrusted to frame laws on betting and gambling
(Entry No. 34), laws on duties of excise on liquor and narcotic drugs (Entry No. 51),
Taxes on the entry of goods in the local areas (Entry No. 52), Taxation on the
consumption and sale of electricity (Entry No. 53) and taxes on the sale or purchase of
goods other than newspapers (Entry No. 54) etc.

As mentioned above List – III i.e. concurrent list has also been incorporated in the
Constitution which gives power to make laws to both Union and the State. The laws on
price control (Entry No. 34), Weights and Measures (Entry No. 33-A), the laws on
electricity (Entry No. 38), and Stamp Duties (Entry No. 44) etc. are the some of the areas
where both Union and the States have power to legislate.

With respect to taxation, Indian Constitution provides extra safeguards and conditions.
Part XII of the Constitution deals with Finance, Property, Contracts and Suits and
Article 265, under Chapter XII, clearly mentions,

“265. No tax shall be levied or collected except by authority of law.”

Therefore, in the matter of taxation, both Union and the State can levy and collect tax
after passing an appropriate legislation on the subject.

As the constitution presently demarcates the power between Union and States to
formulate even the fiscal legislation on areas of taxation, the main issue that remains to
be resolved at priority is integrating these powers at a level which has power to issue
GST. In our constitutional framework, the duty of excise (on manufacture of goods), the
duty of customs (on imports and exports of goods brought to and out of India), Central
Sales Tax (tax on inter-state sale of goods), and Service tax (on delivery and
consumption of intangible services) are levied by Union where as sales tax on sale of
goods within a state, excise duties on alcohol and opium, various cess like mining cess
and seigniorage fees, octroi charges on goods entering to State and entry tax on good
brought within local areas are levied and collected by State. Some duties like stamp
duties etc. are collected by State though even Union has power to make laws on such
subjects like Stamp duties being the subject matter under Concurrent List (List – III) of
Seventh Schedule of Constitution. Therefore, any GST which tries to levy taxes on
various such areas should first clear the hurdle of constitutional allocation of power
among states and Unions to make laws pertaining to various fiscal heads.
 III. CONSTITUTIONAL AMENDMENTS FOR GST IMPLEMENTATION

In Introduction above, it has been made clear that there is a need of constitutional
amendments for bringing GST alive in India. What are those changes that are required
to be brought within constitution depends on what are the subject matters, duties and
levies that would be subsumed in GST.

There are deliberations on the matter and mainly two reports have been released
outlining what GST would look like and how it may contain within its ambit. This
article discusses those reports as a main theme of our discussion and bases any opinions
based on the views opinioned in those reports.

The two reports that form the basis of our further assumptions, discussions, postulates
and propositions are:

A. First Discussion Paper on Goods and Services Tax in India released by The
Empowered Committee of State Finance Ministers released on November 10,
2009 at New Delhi (herein after referred as ‘First Discussion Paper’;
B. Report of the task force on Goods and Services Tax, released by Thirteenth
Finance Commission released on 15th December, 2009 (herein after referred as
‘Second Paper’).

The first discussion paper was released by the empowered committee of State Finance
Ministers. The empowered committee comprised of State Finance Ministers of all states
and was headed by Asim Kumar Dasgupta (Chairman, Empowered Committee of State
Finance Ministers), also a minister of Finance & Excise, Government of West Bengal.
The report in its very first page makes a comparative claim that Value Added Tax
(VAT) being an improvement against then existing state level sales taxes; GST will be
further significant breakthrough, the next logical step, towards, a comprehensive
indirect tax reform in the country.
As per the discussion in Para 3.4 of First Discussion Paper in page 19 of the Report, the
following central level duties have been recommended to be subsumed in GST at the
initiation of GST in India:

A. Central Excise Duty;

B. Additional Excise Duties;
C. The Excise Duty levied under the Medicinal and Toiletries Preparation Act;
D. Service Tax;
E. Additional Customs Duty, commonly known as Countervailing Duty (CVD);
F. Special Additional Duty of Customs – 4% (SAD);
G. Surcharges; and
H. Cesses

Similarly, the following state level duties have been recommended to be subsumed in
GST:

A. VAT/ Sales Tax;

B. Entertainment Tax (unless it is levied by the local bodies like Municipality or
Village Panchayat);
C. Luxury Tax;
D. Taxes on lottery, betting and gambling;
E. State Cesses and Surcharges in so far as they relate to supply of goods and
services;
F. Entry Tax not in lieu of Octroi;

After going through the proposed list of taxes which are to be subsumed in GST, the
following constitutional amendments should be effected before introduction of GST:

1. The State should be empowered to levy and collect duty of excise (chargeable on
manufacture of goods);
2. The State should be empowered to levy and collect service tax on provisions of
services;
 3. The Union should be empowered to levy taxes on such activities which are
currently in the State List.

Above three are the basic requirements to make GST implementable in India and this
requires substantial constitutional amendments in various Articles of Indian
Constitution as well as List I, II, and III in Seventh Schedule be amended.

Regarding the requirement of Constitutional Amendment, the First Discussion Paper in

Para 1.14 underlines the necessity of constitutional amendments. While outlining the
introduction of service tax2, the Report states that a suitable constitutional amendment
should be brought giving power to state to tax all services, which till now, is only with
Union/Centre.

While discussing the GST on imports, the First Discussion Paper in Para 3.8 emphasizes
on the need of Constitutional Amendments empowering states to tax imports of goods
and services into India. Under the present constitutional set up, imports and exports of
goods into and from India is governed by Customs laws of India and only the Union is
empowered to tax. Similarly, any taxation of imports and exports of services also vest
on the Union.

2
As discussed above, Article 265 of the Constitution lays down that no tax shall be levied or collected except by the
authority of law. Therefore, every taxing activity should be backed by proper legislation. Service tax was introduced
in India for the first time in 1994 under Finance Act, 1994. The Act was enacted by Union under Article 246 and
under Article 248 of Constitution of India read along with Entry 97 of List I in Seventh Schedule of Constitution and
was made applicable whole of India except State of J & K. The Entry 97 mentions, “Any other matter not
enumerated in List II or List III including any tax not mentioned in either of those Lists.”

Therefore, taxes on services, not being under any entry in List II and III, was the subject matter covered by Entry 97
of List I, which is also called ‘Residuary Entry’. However, later, the Union felt to give a strong constitutional backing
to the levy and collection of service tax and hence, Article 268A has been inserted into the Constitution of India for
Service Tax levy by Union Government, and collected and appropriated by the Union Government and the State
Government as prescribed under the law made by the Parliament. Similarly, Entry 92C has been introduced in the
Constitution in Entry – I of Seventh Schedule whereby Union is empowered to enact law on taxation of services.
These Constitutional amendments were brought by the Constitution 88th Amendment Act, which came in effect
from 15th January, 2004. Not only for the taxes but for cesses which are imposed on amount of service tax collected
by Union, constitutional amendments were brought in Article 270 authorizing the levy of collection of cesses on
service tax vide 88th Amendment of Constitution.
In reply to Question No. 18 in Page 52 of the Report, the First Discussion Paper
underscores the essentiality of constitutional amendments for empowering Union to
levy tax on sale of goods, which essentially means empowering Union to levy tax on
sale of goods within a state and sale of goods outside state.

With respect to Constitutional issues, and the amendments required, the second Paper
also outlines some of the issues and suggests how it can be streamlined. While making
its suggestion in Para 11.10, the Second Paper stresses on flawless GST mechanism and
suggests constitutional amendments in such a way that enables both the Centre and the
States to exercise concurrent jurisdiction over the taxation of all goods and services, and
creation of the proposed Council of Finance Ministers as constitutional body at the helm
of the affairs of managing, and implementing GST uniformly across the states. The
Council is recommended to be responsible for any modification in the initial design of
the dual GST and regulating the indirect tax system in the country.

While deliberating on the first suggestion, the emphasis is on removing all the entries
relating to taxation which would be brought to GST from List – I and List – II of the
Seventh Schedule and inserting all such entries and a consolidated entry of ‘Taxes on
Goods and Services’ in List – III, Concurrent List under Seventh Schedule. This gives
concurrent jurisdiction on the state and the union to tax goods and services. However,
this amendment may not work well as there is likelihood of conflicts among the union
and the states and the law made by union prevails over the state concept may destroy
the whole purpose of GST. In any case, entries under Schedules are not the empowering
blocks under Constitution to authorize union or states to enact laws, the empowerment
must come through appropriate Articles. Hence, there would be necessity of suitable
constitutional amendments in Articles 245, 246, 248 and 268A.

In its recommendation, the Second Paper also highlights the necessity of amendments
of Article 2783 and Article 288 of the Constitution so as to enable Union and States to

3
The Second Paper wrongly mentions Article 278. It should have been Article 287.
levy of GST on supply of electricity to Government at all levels like any other normal
goods.

IV. CONCLUSION

In the light of implementation date being rescheduled twice, and the another date from
which GST is expected to be implemented being 2011 April, the government has good
amount of time to make its basics straight and to draft a suitable constitutional
amendments. Meanwhile, government can also float a paper on constitutional bill and
can ask for comments from experts on constitutional law.

There is a need to ensure two fold requirements in any constitutional amendments. The
first one is to meet the objective proposed by introduction of GST – a robust indirect tax
regime in India which minimizes unwarranted cascading effects, and smoothens the
supply chain till the level of consumers, and the other objective that any amendments
should meet is not to abrogate federal autonomy that states enjoy in framing fiscal
legislations.

Also, such constitutional provisions should be flexible within its rigidity to make
provisional emergency provisions when states face acute economic emergency.
Constitution can provide the mechanisms and procedures to be adopted to amend GST
when such grave situations are faced by the states.

Though in this paper, little attention has been paid to dwell on Central Council of
Finance ministers (which I will be discussing on some other paper), this is a very
important aspect that constitution must address. If each state is allowed to tinker with
GST tax base and rate, then, there will be every possibility that this noble work will not
bring any better situation than that is prevalent today. These above are some of the
issues that need to be dealt by constitutional amendments in the process of introducing
GST In India.